Australian shares plunge as US-China trade war escalates

More than $50 billion has been wiped from the value of the Australian share market after a dramatic escalation of trade tensions between China and the United States triggered a global sell-off.

The benchmark S&P/ASX200 index plunged almost 3 per cent in the first 15 minutes of trading today, falling 179.1 points to 6,461.2 points. The broader All Ordinaries Index fell 185.5 points, or 2.76 per cent, to 6,525.1 points.

The Australian dollar also dived this morning, hitting a low of US67.51 cents.

Stocks appeared to stabilise at around 6480 points by midday – still down 2.4 per cent from the start of trade. The dollar settled at US67.83.

The latest economic data shows Australia is still exporting heavily, but the drought is hitting livestock numbers and housing approvals have dropped 20 per cent in one year. The Reserve Bank of Australia also left official interest rates on hold at 1 per cent.

The market turmoil came in response to China letting its currency slip to fight back against the United States in their trade war.

Australian Bureau of Statistics data released on Tuesday shows Australia is exporting more than it's importing, with China still the main driver for export growth.

The national trade surplus is now at a record $8 billion, as exports climbed one per cent, but imports dropped four per cent.

But the number of new houses approved dropped 1.3 per cent from May to June, and dropped more than 20 per cent compared to June 2018.

The drought also is hurting sheep and lamb numbers, with the number of sheep slaughtered down 13 per cent over the past year, and lambs down 9.3 per cent.

The early losses shaved around $57 billion in value from the companies listed on the All Ordinaries.

Tech and healthcare shares had the steepest losses after the first 15 minutes of trading, slumping 6.52 per cent and 3.85 per cent respectively.

Every sector was down more than one per cent in early trade, with materials and utilities having the smallest losses.

Mining giant BHP was down 1.85 per cent to $36.69, Rio Tinto was down 2.25 per cent to $89.43, and Fortescue was down 4.16 per cent to $6.795.

The big four banks - ANZ, Commonwealth, NAB and Westpac - were down between 2.38 per cent and 2.99 per cent each.

Gold miners were among the few bright spots as investors looked for safe haven, with Newcrest, Northern Star, Evolution Mining, St Barbara, Dacian and Saracen rising between 2.82 per cent and 5.85 per cent.

The three major indices on Wall Street had their steepest percentage drops of the year overnight, with the Dow Jones Industrial Average finishing down 2.9 per cent, the S&P 500 down 2.98 per cent and the tech-heavy Nasdaq Composite down 3.47 per cent.

The market turmoil, sparked by escalating US-Chinese trade tensions, appeared to flare up on Tuesday morning after the US Treasury Department said that it had determined for the first time since 1994 that China was manipulating its currency.

The Chinese government devalued the yuan to fall below its 7-to-1 ratio with the US dollar for the first time in a decade. A weaker currency could soften the blow the United States has dealt China with its tariffs.

Analysts linked the devaluation of the yuan by the People's Bank of China (PBOC) to US President Donald Trump's threat last week to impose tariffs on Chinese imports to the US.

"The PBOC has effectively weaponised the exchange rate," Julian Evans-Pritchard, senior China economist at Capital Economics, said.

The weak yuan ignited fear on Wall Street that a currency war has begun or that the United States would respond with even higher tariffs, prolonging the standoff with China and potentially weakening the global economy.

The Reserve Bank of Australia will announce its decision on interest rates at 1430 AEST on Tuesday.

The Aussie dollar is buying 67.68 US cents from 67.71 US cents on Monday.

Deliberate destruction

China's offshore yuan has hit a record low, fuelling fresh selling in global financial markets, after the United States branded Beijing a "currency manipulator" in a rapidly escalating trade war between the world's two biggest economies.

In a strongly worded editorial, the official Communist Party newspaper the People's Daily said on Tuesday the United States was "deliberately destroying international order" and holding its own citizens to ransom.

The US Treasury Department said Monday that it had determined for the first time since 1994 that China was manipulating its currency, knocking stock markets and the US dollar sharply lower and sending gold prices to a six-year high.

The announcement came hours after China let the yuan break through the key 7-per-US dollar level for the first time in more than a decade, in a sign Beijing might be willing to tolerate more currency weakness as Washington threatens to impose more tariffs on Chinese goods from September 1.

The offshore yuan fell to as low as 7.1397 per dollar in early Asian trade on Tuesday before clawing back most of the losses after China's central bank said it was selling yuan-denominated bills in Hong Kong, in a move seen as curtailing short selling of the currency.

Onshore yuan also opened weaker about 7.0699 on Tuesday. While the central bank set a slightly firmer-than-expected morning benchmark rate of 6.9683, it was still the weakest since May 2008.

Chinese monetary authorities let the yuan slide past the 7 level so that markets could finally factor in concerns around the Sino-US trade war and weakening economic growth, three people with knowledge of the discussions told Reuters on Monday.

The People's Bank of China has insisted the value of its currency is determined by the market, though traders say it had been supporting the currency when it threatened to breach the key level during the past year.

Analysts said the US move could escalate the trade war, which had already been spreading beyond tariffs to other areas, such as technology.

JP Morgan Asset Management APAC Chief Market Strategist Tai Hui said it was "another major setback to the possibility of a trade agreement".

China's commerce ministry announced overnight its companies had stopped buying US agricultural products in retaliation against a move announced by Washington to raise levies on Chinese goods from September 1.

Tommy Xie, head of Greater China research at OCBC Bank in Singapore, said the US decision could trigger a "vicious cycle".

US President Donald Trump had earlier declared China's move to be "a major violation" and analysts said it was likely the White House pressured the Treasury Department to issue the designation.

What does currency manipulation mean?

A devalued currency may seem like a bad thing, but in an export-heavy economy like China, it's highly beneficial.

By deliberately devaluing the yuan, countries that buy products from China have to pay more for them.

It also makes people in China more likely to buy products from within the country.

It's economic manipulation that countries like Australia, which has floated its currency, cannot do.

By keeping a strict control over the yuan, Beijing has maintained a weapon in the trade war that the US does not have.

It's a high-risk manoeuvre, one which has rattled the world economy.

China is betting that the US will blink before it does in the trade war.

And as a big buyer of Chinese imports, Australia is caught in the crossfire.